Subcontractors sign a lot of contracts. Most are long, written by the owner and/or the prime, and designed to favor the drafting party. That is simply how things work. The problem is that subcontractors who sign without reading carefully are often agreeing to terms they do not fully understand until a dispute arises. When that happens, they may find themselves losing money because of their own lack of awareness.
The good news: subcontract agreements, however long they appear, tend to generate disputes around the same handful of provisions. Knowing those provisions before you sign is the most effective risk management strategy available.
Pay-if-paid versus pay-when-paid
This is the clause that matters most, and the one subcontractors most often misread. These two provisions sound similar. They are not.
Pay-when-paid conditions the timing of your payment on when the prime receives payment from the owner. Payment is delayed, not eliminated. That is generally enforceable in New York.
Pay-if-paid is a different animal entirely. It makes the prime's receipt of payment from the owner a condition precedent to the prime's obligation to pay you at all. If the owner never pays, for any reason, the prime owes you nothing. New York courts have enforced these clauses when they are explicit and unambiguous. The language matters enormously.
The difference between "when" and "if" in a payment clause can be the difference between a delayed check and no check at all.
Good relationships do not eliminate contractual risk. Before signing, identify which clause you are dealing with, assess how creditworthy the owner is, and decide whether the risk allocation makes sense for this particular project.
Scope of work and change order rights
Scope disputes are among the most common disputes in construction. The scope of work provision defines what you agreed to do, and by implication, what you did not agree to do. A vague or broadly written scope creates serious exposure when the prime asks you to perform work you did not price.
The change order provision matters just as much. Most subcontracts require written authorization before additional work can be compensated. Performing work outside the original scope without written approval, even at the verbal direction of a project superintendent, can eliminate your right to additional compensation entirely.
Before signing, confirm two things: the scope language is specific enough that you know exactly what you are responsible for, and the change order process is one you can actually follow in the field.
Indemnification
Indemnification clauses require one party to defend and hold harmless the other against certain claims or losses. In subcontracts, these provisions typically require the subcontractor to indemnify the prime, and often the owner, against claims arising from the subcontractor's work.
A narrow indemnification tied to the subcontractor's own negligence is reasonable. A broad one that extends to claims caused by the prime's negligence is a different matter entirely. Certain forms of that broader obligation are statutorily limited in New York.
Read it carefully. Understand what you are agreeing to cover, and whether your insurance actually provides that coverage.
Notice requirements
Many subcontracts include strict notice provisions requiring written notice of claims, delays, or changed conditions within a specified window, often 7 to 14 days of the triggering event. Miss the window and you might waive the claim entirely, regardless of its merits.
This is a frequent reason why subcontractors lose otherwise valid claims. The work happens, the problem gets documented internally, and the notice deadline slips. By the time the claim is asserted formally, the window has closed.
Know the notice requirements before work begins. Build a field process for identifying triggering events and getting written notice out on time.
Termination provisions
Most subcontracts include both a termination for cause and a termination for convenience provision. Termination for cause allows the prime to end the subcontract based on default, typically triggering back-charges and liability for completion costs. Termination for convenience, a clause generally required in government-funded contracts, allows the prime to end the subcontract for any reason, with compensation limited to work performed.
Understand both. Pay particular attention to what constitutes a default. Some subcontracts define it broadly enough to include conduct that would not ordinarily be considered a material breach. That is a topic we will cover in more depth in the coming months.
Nicole Green, Esq. PLLC advises contractors, subcontractors, and nonprofits on construction law, government contracts, and compliance matters in New York.